Prize winning economist Paul Krugman asks a question every automaker and dealer struggles to answer in his NY Times column 06-21 “Profits without Production.”
That question comes to grips with an issue faced by any dealer, hospital, non-profit library or low-fee lawyer: “What’s more important-profits or production? Selling more cars or more profitable cars?”
Or if a government agency or public library, making money, buying books, or if a dealer, raising grosses or selling accessories?
In its heyday, notes Nobel Prize winner Krugman, a Princeton professor, General Motors was both profiteer and producer deluxe.
“The company’s value in the 1950s and 1960s,” asserts Krugman, “came largely from its productive capacity.”
Profits were deemed acceptable, when based on return on investment (ROI), embracing hundreds of plants and 19 percent of the total U.S. nonfarm work force.
GM, led by expansionist profits-driven chairmen, was a fountain of gross and net profits, spewing out dividends, bonuses and passenger cars in endless quantities.
Concludes Krugman, along with fellow Ivy League economists, profits “aren’t the only thing, they’re everything.”
For big and small dealers alike, profits can be a guide to success, while lack of them conveys failure.
Whether based on ROI or gross over net or every individual deal, profits are relevant and indicative of a dealer’s progress (or absence of same).
Krugman has a closing note, which bears watching: “If corporations, despite soaring profits, have little incentive to invest, you have a recipe for persistently depressed demand.”
That’s the rub!-keeping demand up leads to profits with production. Krugman must see the light as he ponders GM’s challenge today.